Amazon.com (AMZN 0.13%) passed another milestone this week: Its stock reached $1,000 a share for the first time ever.
For investors, the event was hardly a surprise. Amazon has been knocking down price targets over and over, like clockwork. It has bucked the odds time and again, surviving the dot-com bubble, coming to dominate nearly every category of e-commerce, and becoming a leader in far-flung industries like cloud computing and video streaming.
Plenty of ink was spilled in the financial media last month on the 20th anniversary of the e-commerce giant's IPO and the blockbuster returns the company has generated since. The stock has gained more than 50,000% since its debut. In other words, $1,000 invested in Amazon in 1997 would be worth over $500,000 today.
With the company now worth nearly $500 billion, it may seem foolish to speculate about when Amazon might hit $2,000 a share, but that day may come sooner than you think. After all, it took less than two years for Amazon stock to double from $500 to $1,000. Here are a few reasons $2,000 might likewise be only a few years away.
1. Sales growth continues to be phenomenal
No company with annual revenue over $100 billion is growing as fast as Amazon. Sales have increased by 20% or more in nearly every quarter in the company's history, and it has tapped into several markets with long growth paths ahead of them. Overall sales increased 23% in its most recent quarter, and in its core business, North American e-commerce, sales jumped 24%.
Prime Air is one of the company's many initiatives that could yield significant returns Image source: Amazon
The company continues to invest in infrastructure including new fulfillment centers that allow for speedy delivery, more original programming for Amazon Prime Video, and enhanced capabilities for its cloud-computing division, Amazon Web Services. At the same time, it is tapping into new business like groceries with Amazon Fresh, and new markets such as India, where it already invested $5 billion and recently began offering Amazon Prime Video for just $7.50 for the first year -- what Netflix charges there per month.
Those investments in fast-growing markets should help the company continue to grow sales at a fast clip, especially as consumers gradually shift ever more of their spending to e-commerce.
2. Profit growth is accelerating
For years, Amazon's profitability was borderline, due to the company's dual strategies of plowing its cash flow back into growing the business and keeping prices low and margins thin to build its customer base. However, the days of near breakeven profitability have come to an end. Thanks to the AWS juggernaut and a maturing e-commerce operation at home, Amazon is starting to put up substantial profits. Over the last four quarters, net income was greater than $2.5 billion, and that number should increase as AWS becomes a greater part of the business, and the company continues to gain leverage in its e-commerce operations.
AWS now contributes more operating income than North American e-commerce, and operating income in the cloud computing division jumped 47% in the most recent quarter to $890 million. In other words, operating income from that division could easily hit $4 billion this year, and, if the growth rate holds, could be $6 billion in 2018. In addition to helping the bottom line, that also gives Amazon additional cash to plow back into the business, further strengthening its advantages.
What this means for investors
The market has long afforded Amazon an unusually high earnings multiple, based on its unmatched array of competitive advantages. While its P/E ratio, which is nearly 200 today, is likely to compress as profits grow, investors seem confident in the company's growth trajectory and trust that profits will follow.
At its current growth rate, revenue will double in a little more than three years. Profit growth is likely to be much faster than that; earnings could hit $10 billion or more three years from now. If that happens, don't expect the stock price to be too far behind. With its momentum and competitive advantages, it's easy to imagine Amazon becoming the world's first trillion-dollar public company.
